Byline: Daniel Gross
The Treasury secretary was largely responsible for directing the federal government's response to the financial crisis. He's still got his work cut out for him.
Gross: After moving to Washington, you put your house in suburban New York on the market for less than you paid for it. Analysts saw that as a great metaphor for the national housing crisis: the Treasury secretary is going to take a loss on his house. Did you manage to sell it? Geithner: We decided to rent it very early, because rents were better than prices in most of the country, and it was a financially good decision. It wasn't as good a metaphor as people thought.
Before the bust, the financial system was clearly far too big--something like 35 percent of corporate profits in 2007. Has it shrunk enough? It has shrunk quite a lot already, almost by any measure. The weakest parts of the system washed out quickly, and the leverage at the remaining institutions is much lower than it once was. But don't overdo it. Our financial system is much smaller, as a share of GDP, than the financial systems are in other major economies like the U.K. The profit share of the financial sector was high because U.S. firms were the preeminent global institutions. Ex ante, it's hard to know what the right size of the financial system is, but we need to make sure the system is more stable, less risky, and has a stronger foundation.
Do you think financial-industry leaders get it that they should be less aggressive, less risky? [Pause] Yes, I do. Our job is not to hope that they decide that, but to ensure it's what happens. There will always be a conflict between what they think is the way to optimize shareholder returns with what works for the system as a whole.
It's common to hear congresspeople complain that "we did the bailout, but this business in my district can't get a loan." Has there been a failure of communication? I've got lots of weaknesses and failures of communication, but I always tried to say that the capacity to lend will be much stronger because of these [rescue] efforts. In recessions, loan demand falls, and in recessions that follow big financial booms it's going to fall more than usual. You can't view that as an indication of whether policy is working. Our strategy was to make sure that we didn't have a perverse contraction that would starve economically viable firms of credit. We haven't got it perfect yet. But it's been very successful relative to what happened in past crises, and the best measure of that is the sharp fall in the cost of credit.
What about housing? There seems to be universal dissatisfaction with the process for helping people who are facing foreclosure. We were very careful from the beginning--but the qualifications get lost--to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people's basic sense of financial stability.?[We tried to make clear] that what we'd do to prevent foreclosure would be very targeted and limited. We wouldn't try to keep people in homes they couldn't fundamentally afford. While we thought we'd lowered expectations, we're still being hung for letting expectations get ahead of policy.
Federal Reserve chairman Ben Bernanke has been batted around in congressional hearings recently. And I hear hedge-fund managers mount critiques of the administration and the Fed that could come out of the pages of The Nation. We're seeing populism from both the right and left. And the center.
Populism from the center? Look at independents. The country is torn between these two, not completely unrelated, basic impulses out there. One is that Washington is out of control; those people in Washington did this outrageous, take-over-the-economy type of stuff. And the other is that they haven't done enough to help real people. …